A self-build mortgage is a mortgage taken out against a property you are building yourself. In many respects, a self-build mortgage is like development finance, only instead of selling the property upon completion of the project, you’ll live in it.
With a self-build mortgage, the funds will be released in stages as the project progresses. This minimises the risk for the lender, and ensures that the project progresses as it’s meant to. Then, once the project is complete, you can refinance onto a standard residential rate.
If you want to build your own home, you’ll need a specialist self-build product. Self-build mortgages are typically more expensive than residential rates, so it’s important to scour the market carefully for the best deal. But despite the increased cost, there can be wider financial advantages to a self-build mortgage, as more and more homeowners are discovering.
For one, a self-build mortgage enables you to build your dream property. When moving house, many borrowers will spend a great deal of money on interior design at any rate. With a self-build mortgage, the finished product can be exactly the space you need. If you have the right team in place, the result can be a beautiful home which you can enjoy for many years to come.
In some instances, there is also a financial incentive. In our experience, self-build mortgages have become more popular in recent years, following changes to stamp duty in the UK—particularly for properties valued over £925,001. The portion from £915,001 to £1.5million is now taxed at 10%, whilst any portion above £1.5million is taxed at a Stamp Duty Land Tax rate of 12%.
This means that, on a £2million property, there is now an effective rate of 7.7%, which works out at an impressive £153,750. This is understandably off-putting. Some buyers are finding a way around this by purchasing smaller, old properties, knocking them down, and re-building from scratch. This effectively allows you to create your dream home, exactly to your specifications, but without paying huge amounts of stamp duty and the cost of redecorating a home to your exact tastes. In our experience, the savings made by doing this will more than compensate for the higher cost of a self-build mortgage.
Likewise, many homeowners looking to move to a large property are now reconsidering, as a slower market means it isn’t necessarily the best time to sell. Add to this the fact increased stamp duty means the cost of moving to a larger home may feel prohibitively expensive, and it’s clear why many homeowners are instead choosing to work with their existing plot, as this case study illustrates.
Whether you’ve always dreamt of building your own home, or are simply looking to expand the size of your current property, a self-build mortgage could be the solution you’re looking for. However, if you’re simply looking to build an extension or carry out some refurbishments, there are other products which could help, so consult with a broker to find out exactly what you’ll need.
With only a limited number of specialist lenders offering self-build products, it can be difficult to know who to approach and what to expect. Fortunately, we have excellent relationships with a number of lenders who operate in this arena, and can negotiate on your behalf for the best deal. If you’d like to know more about what self-build mortgage products are currently available, I would be happy to advise you further.